Small businesses can claim health tax credits

The new health care reform law is designed to help more businesses provide their employees with health insurance. The law works through a combination of tax breaks and cost-reduction strategies.

One provision aimed at small businesses — those with 25 or fewer employees — kicks in this year. Many of those businesses will be able to claim tax credits for up to one-third of the cost of their employees’ health care, according to a report released last week.

The report, titled “A Helping Hand for Small Businesses,” examined how many employers will benefit from the new credit. It was prepared by Families USA, a national consumer health group, and Small Business Majority, a business advocacy organization.

The authors of the study provided information to answer several commonly asked questions:

QUESTION: What is the health care reform tax credit?

ANSWER: The health care reform law passed by Congress and then signed by President Barack Obama in March has just started to unfold. One of the first provisions to take effect is a special tax benefit for very small businesses, which have the most difficulty affording health insurance because they lack economies of scale. The credit allows these businesses to reduce their tax bill by subtracting up to 35 percent of their employee premium costs. The benefit begins for premiums paid in tax year 2010.

QUESTION: How many businesses are eligible for the credit?

ANSWER: As many as 450,000 businesses in California will qualify for the tax credits. Of those, around 140,000 will qualify for the maximum credit. These numbers represent around 80 percent of all small businesses in the state.

QUESTION: How will I know if my business qualifies?

ANSWER: You’ll need to meet three conditions. The business must have fewer than 25 full-time-equivalent employees not including the owner, pay average annual wages below $50,000 per employee, and contribute at least 50 percent of each employee’s premium. Visit smallbusinessmajority.org to use an interactive calculator for your business. You can also find information from the nonprofit Henry J. Kaiser Family Foundation at healthreform.kff.org.

QUESTION: Can you provide an example of how the tax credit will work?

ANSWER: Let’s say an employer has nine full-time employees with average annual wages of $23,000. The employer pays $72,000 in premiums for those employees. This employer’s credit for 2010 equals $25,200 (35 percent of $72,000).

QUESTION: How much money will I save?

ANSWER: The smallest firms with the lowest wages — those that employ 10 or fewer workers who earn an average wage of less than $25,000 — are eligible for the full 35 percent tax credit. Other small businesses will receive a portion of the credit based on a sliding scale. Nonprofits are eligible for a 25 percent tax credit. Note: Tax credits can’t be larger than a business’s tax liability.

QUESTION: What are some other benefits for small businesses in the health care law?

ANSWER: Beginning in 2014, small businesses will be able to qualify for a larger tax credit, up to 50 percent. They also will be able to purchase health coverage through a new marketplace called an exchange, designed to offer competitive rates. Also beginning in 2014, insurers won’t be able to hike premiums for a small business based on an employee’s pre-existing condition.